The Hungarian president’s New Year’s Message

I have the feeling that László Sólyom with his New Year's Message this year will not please those who are supporters of the current government. The president again seemed to put all the blame on the socialists and neglected to ask for cooperation and solidarity from the opposition. On the other hand, Fidesz is surely rejoicing because they can find in his speech the favorite political slogans of the party I personally consider annoying clichés. Among these the most irritating is "Hungary used to be in the lead and now it is among those bringing up the rear [sereghajtó]." That is usually mentioned either in connection with the neighboring countries or sometimes in the context of Europe as a whole. That means that once upon a time, especially between 1998 and 2002, everything was peachy pie but since then the socialist-liberal government has ruined it all. Hungary has become the poorest, the slowest developing country whose recovery will be very slow if at all possible. Orbán at one point talked about a decline that is setting the country back twenty years. Yesterday an Internet paper described 2008 as the year of total economic collapse in Hungary! Either they or I don't know the meaning of economic collapse. I suspect it's not me.

This kind of economic doom seems to be spreading in the media and the Hungarian public is prone to unwarranted pessimism anyway. President Sólyom's New Year's Message didn't help the situation. Surely, we all know that next year will be even more difficult than 2008 was, but the Hungarian situation is nowhere as bad yet as, for example, that in the United States. Up to this point a few thousand people have been laid off and most people didn't restrain their Christmas spending. And yes, often the purchases were made on credit. And yes, this is bad. And yes, it is perhaps even the duty of the president to warn people. But it does make a difference how he does it. Creating panic, spreading gloom and doom under the present circumstances is counterproductive. That is one of the problems with this speech. The other is that Sólyom's description of Hungary's current situation is not based on facts. For example, it is not true, at least not at the moment, that the "worldwide financial crisis and the economic recession especially affect Hungary negatively." Why? "Because the crisis found the country already in a weakened state." And what is the remedy? "The way out of this crisis, the urgent introduction of basic changes, is the responsibility of the government." Again, the bad reflexes of the Kádár regime: the government will take care of everything.

After this Sólyom turns away from the government and talks to "people of good will." He tells them that in the final analysis they are the ones who elect the politicians and thus the government and urges them "to express their opinions, put pressure on the politicians, and check the activities of their representatives." While other statesmen in situations like this talk about solidarity, lending a helping hand to others in trouble, Sólyom tells his people that "in times like one can rely only on oneself, one's family and friends." "Independence of thought" is very important in order to avoid being crushed by the crisis. Independence of thought also means "self-esteem." And now comes a sentence that I have difficulty interpreting: "In these very hard times it is necesary to be self-assertive and we as people of responsibility must turn down any attempt to be used either politically or economically." Who wants to use the people for economic or political purposes? It is so vague. Does he mean either side of the political spectrum or both? The trade unions? Who knows?

The whole speech seems to me hastily thrown together. A few sentences after he says that we can rely only on ourselves and our families he changes his tune. Suddenly we are told that actually "independence cannot be separated from solidarity." (I'm not sure at all how these two concepts are linked, but perhaps there is some connection I am unable to see.) Suddenly, he discovers solidarity "beyond the direct assistance of friends and family." He calls on the churches that, by the way, haven't done much for example for the most miserable group of people in Hungary, the Gypsies, but perhaps in this crisis they will get wings.

Finally, he wished "hope and much strength to the people of Hungary and all Hungarians!" And he closed his message with something that has already raised some eyebrows in Hungary. He wanted to share a thought that keeps him occupied lately: "Honesty in the long run pays!" Surely, that has nothing to do with 2009, the financial crisis, and how to cope with it. In my opinion László Sólyom here is talking about the allaged dishonesty of Ferenc Gyurcsány and the government. The Hungarian president according to the constitution is supposed to symbolize the unity of the nation and therefore taking sides in politics is not one of his prerogatives. The other reason for the raised eyebrows is the not so honest election of Sólyom to his current position. The Hungarian constitution provides three opportunities for a person to be elevated to the position by parliament. At the first two occasions the candidate needs two-thirds of the votes. By the third time 50% plus 1 vote will suffice. Sólyom was elected only in the third round but even the 50% plus 1 vote was not a certainty. Therefore Fidesz "checked" the allegedly secret votes of their members. In one case, János Áder, then the leader of the Fidesz caucus, actually made one person change his vote. Thus Sólyom's election was tainted and, according to his critics, if he were "an honest man" he wouldn't have accepted the post under the circumstances. In any case, I think that Sólyom's closing sentence was most unfortunate.

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[sic]
Guest

Even HírTV were forced to admit that shopping was brisk (http://www.hirtv.hu/belfold/?article_hid=251523 ). OKSZ predict sales of 900 billion forints, up 12 billion on last year.
As Hungarians have yet to generate enough wealth from property increased (used property has only shown modest increases for the last 3 years or more), then there has been no opportunity for the economy to overheat and hence suffer the shrink bank that the UK and US now has – similar in kind to that which led to the end of the Japanese/Asian-tiger boom times.

Mark
Guest
While we absolutely shouldn’t be alarmist about the prospects for Hungary (and phrases like “collapse” are especially silly – particularly by comparison with some past economic collapses), we shouldn’t whietwash the difficulties either. Hungary is part of the global economy, and I don’t think can escape the consequences of what is happening to it. Given that its capital is a significant regional financial centre and the country has significant external financing needs – both in the public and household sectors – Hungary is and will continue to be affected by severe international credit conditions. One can argue that these affected Hungary a year earlier than everyone else in 2006 when international markets sounded the alarm about burgeoning state debt. The other issue is the problem of international trade and its impact on the German economy, with which Hungary’s manufacturing sector is rather closely tied. If Deutsche Bank is predicting a 4% contraction in German GDP for 2009, and these predictions are born out, then Hungarian GDP could fall by as much as 6-7% – not a collapse, but a very serious situation by any measure. What makes this serious situation potentially catastrophic – both politically and economically – is the… Read more »
Ricsi
Guest

Solyom is a decent man who speaks from the heart,if that means hurting Gyurcsány and his gang of liars ,then Good.

Odin's lost eye
Guest
The danger of such a speech is that it drives a further wedge into the need for consensus between the Government and the Opposition, this in turn further divides the people. I am not a real fan of the Keynesian Economic idea of governments spending their way out of a recession especially if they have to do it by borrowing money. Spend money on training or retraining those who are out of work, teaching them suitable new skills. I want to learn how to ‘arc weld’. Can I find an evening class or the like? No. In the UK there were many such classes where you paid by the class and if you were out of work and passed the course the Government repaid the fees. When a country is in this state, it is up to the people to create their own wealth by their own activities. Make things that people need, make them ‘good’ and make them ‘cheap’. The problem with credit bubbles is they always burst. One way forward is for the Hungarians to create their own wealth by working. The problem is they won’t. They want the Government to do it for them. Last year I… Read more »
New World Order
Guest
Mark: Given Hungary’s complete reliance on investor investors to finance Hungary’s deficits (which remain substantial even after the substantial efforts of the Government in budget cuting)and those investors unwillingness to buy Hungarian soverign debt (HUF or otherwise denominated), the Country has no choice but lower substantially its reliance on external financing. This can only be done by continuing to cut the budget deficit and by inducing a recession that will balance out the country’s current account imbalances. In normal circumstances, a country in Hungary’s situation would resort to a progressive devaluation of the currency. Hungary is however trapped, because such a devaluation would destroy the household sector, burdened as it is with foreign currency debt. Moreover, it is questionable whether a weaker FX rate would help exports in the face of such a slowdown in the core exporting markets for Hu. The other thing, as you imply a country facing a severe recession would consider (as the U.S. is doing) is to increase substantially Government spending as a counter cyclical measure. But because, unlike the U.S., Hungary cannot finance thisspending this is not an option. Finally, what Hungary needs over the long term is to become more competitive. To do… Read more »
Eva Balogh
Guest

NWO: “And I believe Solyom was correct in saying that Hungary’s relative position (at least in the region) has gone from the “lead” to the rear.”
Just wait! The Baltic countries are in terrible trouble and I have the feeling that Slovakia will be soon in some trouble because of the heavy reliance on the auto industry.

Mark
Guest
New World Order, While I agree with some of your diagnosis of the problem, there is one key flaw in the first part of your argument. You say that without some form of relief from outside devaluation would destroy the household sector by pushing up the HUF cost of FX mortgages. Of course in this you are absolutely correct. The problem is that you suggest inducing a recession to reduce Hungary’s external financing dependency ontop of a serious international downturn. What effect do you think this is likely to have on the household sector? It will exacerbate the recession, unemployment and create a problem of solvency for households at least as great as that created by any devaluation. As western European countries who attempted to maintain currency parities during severe recessions found (remember the UK, Italy and Ireland in 1992-3)the markets will force a devaluation of HUF anyway as the economy contracts and social/political tension increases. The real questions are – how much damage are you prepared to do to the real economy, the population, and social tension in the process of attempting to avoid the inevitable? And do you want a democracy at the end of it? When Germany… Read more »
NWO
Guest
Mark: You raise a couple of interesting points. The last one you mention-basically some form of debt relief-is something that Hungary should have done in 1990 like Poland. It did not. I think partially out of pride and the mistaken belief that the capital markets would reward its willingness to pay back its old debts. As we saw in 1995, Hungary did not get the credit it desired, and has been burdened with a huge historical debt pile from the communist era. This is a problem that still weighs on the Country. Now, however, a debt restructuring that you seem to contemplate, seems highly unlikely and possible counter productive. The Government and the MNB have determined that for a small open economy like Hungary the only salvation is the common currency. The policy regime adopted is to reach that goal asap. I support this strategy because (1) the benefits of the Euro far outweigh the immediate costs (loss of monetary policy freedom) and (2) the Euro adoption rules would limit or ever the power of the Hungarian Government. While in principle I would oppose something that move sovereign power away from the elected organs of the State, given the choice… Read more »
Mark
Guest
New World Order, I substantially agree with you as far as the debt burden is concerned. As far as the prospects for a restructuring are concerned – if it is in Hungary’s fundamental long-term interest to restructure the debt, then the Hungarian government should pursue restructuring as an aim. In keeping with the philosophy that even the blackest clouds have silver linings, I would hope that Hungary’s current problems would create a window of opportunity, and certainly the government should be attempting to create one. I can’t though agree with you on the question of the Euro. I have three points of difference. The first is that there is no immediate prospect of the EU allowing Hungary to join, and not only because of the state of Hungary’s public finances, but also because – as I think 2009 will show – the current economic difficulties raise important questions about the sustainability of the zone that will force the EU to focus on its consolidation, than its further expansion. It is true that Brussels has not yet realized this – hence the laughable suggestions about Iceland, and Barroso even suggesting – in the face of all the evidence – that the… Read more »
New World Order
Guest
Mark: You make an important pointon labour market participation, but in my terminology in supports my contention. I agree that more than the exchange rate or even the fiscal imbalances, the number one problem in the Hu economy is demographics and labor particiation. While there is little a Government can do to change demographic trends (though I would support substantial in-ward immigartion), I believe in Hu low labour participation is largely a function of poor government policies. Primarily far too low statutory retirement ages, too generous terms for long term disability, too high minimum wages and a massive tax wedge which drives people either out of work altogether or at least out of the white economy. All political parties know this problem exists. None of the parties have the guts to seriously address the issue, because they see it as a vote loser pure and simple. MSZP relies heavily on the elderly as a core voting constituent and therefore is unwilling to address the retirement age issue or pension reform. FIDESZ continues to base its policy around crude populism, and the notion that there is a free lunch (lower taxes and higher levels of social welfare transfare payments). My point… Read more »
[sic]
Guest

NWO: I’d also add that the problem of labour market participation is also made worse by the rules governing the return to work of mothers who receive maternity/child support (Gyermekgondozási segély – or GYES as it is more commonly referred to as). Without going in to specifics, there are many unnecessary and unhelpful obstacles that prevent mothers from returning to work, including specifying the exact types of work for which they are allowed to work for on a part time basis without endangering some or all of their GYES. This results in many mothers working illegally, hence preventing them from declaring themselves for tax (which the vast majority of people would like to do) or from being able to include this work on the CVs. There are plenty of other examples of ridiculous restrictions on those returning to work because of ill-health, maternity… And this all obviously distorts the statistics and leaves people with the very uneasy feeling that dishonesty is the only means of survival in the appalling bureaucracy.

Mark
Guest
New World Order, We’ll see on Euro accession. Whatever happens 2009 will be a fascinating year for those interested in the future economic role of the EU. I can see the challenges, but I have no idea how they are going to be resolved at this point. I am pleased we both agree on the centrality of employment to the crisis and its solution, and in some respects our policy responses would be similar – clearly a sea-change is needed in popular understanding of welfare, so that its role as social insurance, rather than a gift from the state, gains greater acceptance; and especially pension reform are fundamental parts of any solution. I think, however, I detect a basic difference in our diagnoses. Your solutions suggest that low labour market participation is a function largely of the operation of the welfare system distorting market incentives to work. I think this is seeing the problem the wrong way around – a bloated and wasteful welfare system has emerged as a the cumulative effect of a set of sticking plaster solutions to mask the social tensions generated by a major employment crisis. While I agree with your earlier points about poor government… Read more »
[sic]
Guest

Mark: “…geographic mobility from the poor to rich areas…” There are two far more important reasons why Hungarians don’t follow jobs 1) they really prefer to stay where they have always lived 2) the cost of moving. On the latter the costs can be enormous especially if one uses an estate agent to help. The estate agents fees are typically as much as 6% of the property, the property tax (illeték) is roughly 5% (it’s complicated, but this assumes you are buying a house for 20m fts, for specifics try http://adozona.hu/kalkulator_illetek.aspx ), the lawyer takes 1%, moving costs etc… at least 1%. So moving can cost you 13% of current property price. This is why people don’t move often, if ever.
Also public transport in Hungary has always been far better than that experienced in the UK. Any where this has been a problem the Government has a very active European funded road development scheme (which unfortunately is counted as spending for GDP purposes, but should really count as investment).
But would developing public transport help anyway? Surely the way forward is the skills and industries of the outsourcing generation?

New World Order
Guest

Mark:
There is a lot to discuss, but I don’t have the time to digest your point in full. I will say, however, I do wonder about the veracity of the employment % statistics in Hungary. Anyone who has spent time in Hungary knows about the crisis level of employment in the black economy. This I think is part cultural (it is not considered wrong to “cheat” the State) and part structural-high tax and administrative costs. Of course, big, foreign enterprises do not employ labour by in large “black”, instead they choose to invest in countries with much lower total wage costs and more flexible rules.
My point is-and I cannot verify the numbers-that a proportion of the low labour participation is due to the still endmic nature of the black economy and part of the solution to more “white” jobs is greater levels of greenfield FDI, something Hungary once upon a time attracted a lot of but in recent years has gone primarily to other countries in the region.

[sic]
Guest
NWO: ‘it is not considered wrong to “cheat” the State’ That is far too harsh. No-one wants to cheat the state, as you put it, quite the contrary. No-one feels at ease or happy with what they all consider to be a necessary evil. Even the economic policies, rules and regulations acknowledge the idiocy of the bureaucracy that prevents honesty. Many of the policies that are needed are in place (allowing mothers to work part time before returning to work full time), some need be reversed (tax incentives for developing old properties against tax incentives for building new – putting money back into ordinary people’s pockets rather than offshore corporations) etc… What you have said of demographics could be greatly eased if minority issues where taken seriously (this would add 10% to the workforce). But there will still be problems that need to be addressed in terms of skill-generation, education and training – in particular for life-long learning, as pointed out by Odin. Even this educational issue was partially attempted, but rejected by the referendum. Like it or not, none of this is really an economic issue, but an issue of political leadership. Your and Mark’s references to previous government… Read more »
NECUNOSCUT
Guest

Ms. Balogh
With further regard to the OV TV series of “minidocumentaries” on Viktor Orban I made a mistake in citing the Video I was discussing. The Video actually is simply
called 24 and was archived Oktober 31, 2007. If this caused any inconvenience I do apologize.

Mark
Guest
Just a couple of brief points ….. Sic, my point wasn’t to attempt to compare Hungary’s public transport with those of other countries (though if the UKs creaking system is the benchmark, that standard by which Hungary is considered good is not a very high one!)What I had in mind was research conducted in Hungary by sociologists in 1992-3 studying unemployment/labour market withdrawal among commuters, and the impact of increases in the prices of public transport on their willingness to travel to take employment. I do think the whole issue of the political economy of transport policy is a fascinating one, and while as a driver on Hungary’s new highways I personally appreciate them, I do wonder whether they were the best use of public funds. Hungary – even relative to its income level – has a low rate of motorization, so building highways is not going to help the geographical mobility of job seekers too much. OK, I can see the arguments in terms of reducing the costs of transporting goods and encouraging investment – but I do wonder whether anyone has thought about the potential impact of growing international concern over climate change, and the likely long-term increases… Read more »
[sic]
Guest
Mark: I would stay away from sociological studies and what Hungarians will say they will or won’t do rather than what they are forced to do. Given the chance to stay put and not travel anywhere, Hungarians will always choose that and complain if the work doesn’t come to them, rather than them to the work. Standard opinion polls and western questionnaire techniques (my first degree was cognitive psychology) are wasted on/insensitive to Hungarian culture. The truth is, outside of academia, in the real world factories have and continue to provide their own transport buses for workers where there is an economic advantage – without pushing this cost back on the already overburdened state. Also, what some would count as the ‘black’ economy is in Hungary institutionalised. Any major international firm here gets away with paying their workers around 50% of their total wage, paying the rest in the kinds of incentives, shares, hidden bonuses that were once common in the City (uk), but have since been clamped down on. In most cases this is not a black economy. Like the hálapénz (what I call ‘blood money’, but is more kindly referred to as a gratitude fee) for doctors and… Read more »
NWO
Guest
Sic- I am sorry to have bored you. I have bored my self also. It is far easier in this case to diagnose the disease than to find a cure. Truth is that Hungary has such a jumble of problems, that there is no easy solution that can come from the text book. In the case of Hungary, I would (1)concentrate on lowering the role of the State in both the society and the economy-lower taxes and other costs of doing business (I believe the current system is a disincentive to investment and working in the white economy)and decrease the organs of Government and the people employed in Government and the bureacracy; (2) bring the private sector more heavily into health care and pensions [while trying to secure a minimum safety net for the most at need][I believe especially in the health care sector the State in Hungary has neither the resources nor intelligence to allocate public money wisely and some private market discipline and competition would help]; (3)invest heavily in education-especially elementary education, including a focus on language skill without such investment the country is doomed]; (4) increase the incentives and rules on employement-increse the retirement age eventually to… Read more »
Mark
Guest
OK, Sic, sorry about the academic analysis, I can’t help it (how do you think I was trained?) Seriously though, to respond to your challenge, while New World Order puts forward a “liberal” response to the current situation, I’d like to say one which is underpinned by a more “social democratic” philosophy. What does this mean in the Hungarian context: (1) Improved competitiveness through a substantial devaluation of HUF versus the Euro, and the maintenance of a low, rather than a high exchange rate. (2) A stress on boosting employment levels. I’d agree with New World Order as to desirability of reducing taxes on employment (though these will have to balanced with new taxes elsewhere); more flexible labour market regulation; and a programme of public investment to boost employability and underpin job creation. (3) Reform of public services that makes them more accountable to users (I think the question of whether this means more state, or more private sector is a secondary question). I think if the state sees say, health services users more as a partner, than a source of money, it will have more success in shaping more rationally functioning systems. (4) Targetted anti-poverty and public health measures,… Read more »
NWO
Guest

Mark-
A last comment.
I think you underestimate the real cost of a substantial devaluation on the country, including:
(1) destruction of household wealth;
(2) risk of substantial home foreclosures
(3) massive losses in the banking industry
(4) increased inflation-not currently a big risk but has been a long term problem-
(5) increasing interest rates, thereby even further chocking off credit availability
At the same time, I am not sure how much it would help the main drives in the export sector. I would help some SMEs. It would help the Pharma companies, but I doubt it has a huge impact on the auto sector.
This country cannot solve its competitveness problem through a big debasing of the currency.

Mark
Guest
NWO, I don’t want to repeat myself, but: As part as 1-3 are concerned, whatever happens there will be some destruction of household wealth and there are major losses to the banking industry anyway, and this is going to happen whatever Hungary does. I think these losses and the risk of home foreclosures can be minimised through an orderly devaluation (as opposed to a disorderly one). Let’s be clear, to have so much borrowing through FX loans was crazy in an economy with the imbalances Hungary has. It wasn’t just crazy to borrow, but it was also crazy for banks like Erste and Unicredit to boost their market share by lending in this way. I think there is a case, both moral and economic, that the losses from irresponsible lending in this case should be shared (the burden shouldn’t just be borne by the borrowers). However, if Hungary’s imbalances are corrected through substantial deflation then the negative factors you identify will be worse. And, you’ll have to add one, which is long-term effect of a recession on unemployment and then labour market participation – something which will be very difficult to reverse. As far as (4) is concerned, the sharp… Read more »
Kertész
Guest

Hungary is in ruins. Since 2002 it is spiralling down the drain. All the rest (what you are saying regarding Sólyom, the hungarian politics in large)is just mumbo-jumbo.

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